Shift from Annuities to CDs Seen in Second Quarter

Annuity sales at banks and thrifts fell during the second quarter as many investors flocked to federally insured certificates of deposit, a consultant said.

According to data compiled by Bank Insurance Market Research Group, banks and thrifts sold $3.63 billion of annuities for the quarter ending June 30, a 7% decline from the previous quarter.

Andrew Singer, managing director with the research group, attributed the falloff to an interest rate environment that has made longer-term fixed annuities look less attractive that CDs.

"Whenever the short-term CD rate gets close to the annuity rate the customer goes for CDs, which are more liquid and FDIC insured," he said.

The most dramatic decline during the second quarter among bank holding companies was at Wells Fargo & Co. The $52.2 billion-asset San Francisco institution saw its sales of all annuities drop 39% during the period, to $125.3 million.

Elizabeth Evans, an executive vice president with Wells Fargo's savings and investments group, agreed that the bank had been stung by narrowing interest rate spreads, which made short term CDs more attractive.

But she emphasized that "Wells Fargo's sales have shifted around as we offer more and more product."

She said several investment products the bank introduced in the first quarter - such as an asset allocation program and unit investment trust - drew assets away from annuities.

Including Wells Fargo, half of the top 20 bank sellers of annuities saw declines.

BankAmerica, though remaining the top annuity bank, saw a 20% drop to $227.5 million in sales.

However, some banks actually sold more annuities in the second quarter than in the first. Shawmut National Corp., based in Hartford, Conn., and Boston, saw second quarter sales jump 35%. Robert Shurman, senior vice president in charge of investment products at Shawmut, said interest rate spreads shouldn't impact a banking company's ability to sell annuities. "Naive sales forces succumb to that," he said.

Of all the annuities sold by banks, 80% are fixed, Mr. Singer said. Many banks said their sales of variable annuities - which have a greater resemblance to mutual funds than to CDs - increased in the second quarter.

Unlike CDs, annuities are not insured by the Federal Deposit Insurance Corp. And customers are compelled to hold their annuity investments - intended to generate income for retirement - because the government taxes investors who cash out before turning age 59 1/2.

So, many customers invest in CDs with maturities ranging from three months to a year and switch the money to a fixed annuity if long-term interest rates kick back up, Mr. Singer said.

The FDIC call reports from which Mr. Singer's Mamaroneck, N.Y.-based firm got its sales data do not differentiate between fixed-rate and variable annuities.